Factors That Influence Exports of Pakistan

Saqib Gulzar, Huixiao Feng School of Management, Harbin Institute of Technology, Harbin, 150001, China saqib@hit.edu.cn , xfhui@hit.edu.cn
Abstract: The exports of Pakistan have fluctuated very wildly for several decades. This paper aims to find out what are the factors that influence the exports of Pakistan. With the help of the latest econometric techniques and regression model we find that agriculture growth rate, commodities producing sector growth rate, domestic saving, inflation, manufacturing sector growth rate, gross national product (GNP) per capita, total consumption, and school enrollment are the main factors that influence the exports of Pakistan during the observed period 1972-2005. Keywords: commodities producing sector growth rate, domestic saving, gross national product (GNP) per capita, and school enrollment

1. INTRODUCTION The exports of goods and services play an imperative role in the economic development of a country and signify one of the most important sources of foreign exchange income. Exports not only ease the pressure on the balance of payments but also create employment opportunities. They can increase intra-industry trade, help the country to integrate in the world economy and reduce the impact of external shocks on the domestic economy. The experiences of Asian and Latin American economies provide good examples of the importance of the export sector to economic growth and development [1]. Hamilton (1791) and List (1841) argued for the promotion of infant manufacturing industries as a vehicle for economic development as in the case of Japan. Since the 1960s, however, infant manufacturing industries expounded by Hamilton and List have been replaced by the increasing importance of export oriented manufacturing activities in several East Asian economies
[2]

. If we have a look at the last three decades,

merchandise exports of developing countries have grown at an average rate of 12% per annum. Manufactured exports accounted for 70% of developing countries exports at the end of the 1990s and 30% of world manufactured exports. These global markets therefore present an excellent avenue for developing countries to participate in the benefits of a buoyant trading environment
[3]

. In recent years the labour intensive

manufacturing exports of developing countries such as China, India, Indonesia, Hong Kong, Malaysia, Taiwan, and Thailand are rapidly increasing; rewarding them with employment, economic growth, and many other benefits. Recently, many researchers have investigated the role of exports in economic growth and the factors that influence it. Gylfason (1997) has taken the data of 160 countries for the period 1985-1994 and finds that high inflation and an abundance of natural resources tended to be associated with low exports and slow growth
[4]

.

Mohsin’s (2004) findings do not suggest a kind of FDI-led export growth linkage and confirm that most of multinational firms’ investments in Pakistan were not export-oriented investments under the observed period 1972-2001
[5]

. Faisal (2004) explains that the basic problem for Pakistan is that its exports are mostly raw
[6]

materials, which are subject to severe price fluctuations in international market prices. The main exports of Pakistan, cotton and rice, are less competitive in international markets . Ali (2005) finds that in Pakistan

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exports are positively affected by exchange rate instability and real devaluation helps in improving the trade balance by reducing imports and increasing exports
[7]

. Sadia’s (2006) findings show that the import of raw

materials and capital goods have an important role in boosting the overall export level of the country; whereas, the country’s exports are more sensitive to the import of raw material rather than capital imports [8]. In this paper, utilizing the latest econometric time series techniques, an attempt is made to identify some of the factors that influence the exports of Pakistan in the period from financial year (FY) 1972 to 2005. The study is structured into six sections. Following this introduction, Section 2 provides a view of exports of Pakistan, Section 3 explains data collection, Section 4 is based on selection of variable and econometric model, Section 5 describes the results and Section 6 concludes our discussion. 2. PAKISTAN’S EXPORT 1972-2005 The exports of Pakistan fluctuated widely during the last fifty-nine years. When viewed against the experiences of the East Asian countries, Pakistan’s export performance has been less than satisfactory. It took 10 years to add $ 2 billion in exports during the 1980s and it took 9 years to add $ 1.5 billion in exports during the 1990s. During the last 5 financial years $ 4.5 billion has been added in exports raising it from $ 7.78 billion to $ 12.3 billion [9]. In the last five financial years Pakistan has achieved a tremendous growth in the exports sectors. Figure 1 clearly demonstrates the fluctuating trend and export volume of last thirty-four years of Pakistan. One major constituent problem of exports is that it is based on relatively low value added and agricultural products that are less competitive in the world market. Some others causes of lower exports include: low industrial outputs, old production methods/technology, unavailability of sufficient funds to producers at reasonable and affordable interest rates, lack of management skills, low foreign direct investment, poor performance of services sectors, high electricity charges and lower credit extensions to private sectors.
0.4 0.3 0.2 0.1 0.0 -0.1 -0.2 1972 1977 1982 1987 1992 Years 1997 2002 16000 14000 Export million US$ 12000 10000 8000 6000 4000 2000 0

% age change in Export

Data source: Handbook of Statistics on Pakistan Economy 2005 and author calculation.

Figure 1.

Fluctuating trend of wxport of pakistan

3. DATA COLLECTION The annual data of all the variables for the period FY 1972-2005 are obtained from the Handbook of Statistics on Pakistan Economy 2005 published by the State Bank of Pakistan. The reason for the selection of this period is that in the FY 1971-72 Pakistan was separated from former East Pakistan (Bangladesh). We perform regression on all variables in delta (∆) form, which gives the true coefficient estimates and produces accurate results. We used the following simple formula to calculate the ∆ form of each variable except the commodity producing, inflation, agriculture and manufacturing sector because they are already available in growth form.
∆X t = X t − X t −1 X t −1

(1)

Where X t represents any variable, t represents the time period and ∆ is percentage change in the considered
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variable (increase or decrease) during one financial year. 4. SELECTION OF VARIABLES AND ECONOMETRIC MODEL We selected eight variable for our regression model: Agriculture growth rate (agri), commodities producing sector growth rate (cpro), domestic saving (dsav), inflation (inf), manufacturing sector growth rate (manu), Gross National Product (GNP) per capita (gnppc), total consumption (tcon) and school enrollment (senr). Agriculture growth rate: Most of Pakistan’s exports are based on agricultural products. Cotton and rice are main exporting products and they alone contribute 66% of the total exports. If there is any change in the agricultural out put (growth) it also affects the exports earning. Commodities producing sector growth rate: Commodity producing sector growth rate is useful only when the domestic consumption is lower or outputs are more then the domestic demand other wise it will cause lower saving, shortage of fund availability and ultimately negatively impact on exports. Domestic Saving: A high domestic saving means low consumption habit, less demand for goods and availability of fund for investment. All real investment in factories, housing and capital spending are financed by domestic savings. Increases in the domestic saving helps in increasing export volume. Inflation: High rate of inflation weakens the home currency. It makes exports of goods and services cheaper for other countries. If the home country has sufficient resources for production than it can taking advantage from this devaluation and increase its exports. Manufacturing growth rate: Manufacturing converts raw materials with the help of manual labour or machines into finished products on a large scale. It helps in increasing the sale value of a product i.e. one pound of cotton converted into finished fabric earns $1.61 on the world market, while the same amount of cotton converted into finished garments raises the income on the same pound of cloth to $4.17 [6]. So increases in the manufacturing growth rate plays an important role in escalating export income. Gross National Product Per Capita: It is observed that a high rate of GNP per capita helps in increasing the exports of a country. It reflects the average income of country’s citizens, economic condition (strength or weakness) and general standard of living. High-income countries are in general well gifted with factors that strengthen the export of any country. Examples include: a skilled human labor and efficient infrastructure (road and rail network), better services, excellent means of transportation, communications and so on. Total Consumption: High rate of total consumption decreases the gross domestic savings and therefore, less money is available for domestic investments. Ultimately it affects the industrial output and export volume of a country. School Enrollment: A lot of industries require human labor for production like sports industry, textile industry, agricultural production etc. High rate of school enrollment causes labor shortage, eventually lowering the industrial output and export volume. With the help of above-mentioned variables we developed the following econometric model:

∆Expt = β 0 + β1∆agrit − β 2 ∆cprot + β 3 ∆dsavt + β 4 ∆Inf t + β 5 ∆manut + β 6 ∆pcgnpt − β 7 ∆tcont − β8 ∆senrt + µt
order to uncover the time series properties of our data. 5. UNIT ROOT TEST

(2)

Before applying any regression function on our model 2. In next section, we will perform the unit root test in

In this section we perform unit root tests for stationarity on the levels and the first differences of all nine variables. (We didn’t perform the unit root test at level for variables; agri, cpro, inf, and manu as they are available in growth form). We have used the Augmented Dickey-Fuller (ADF) unit-root tests. There are three

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situations in ADF test for every time series. First, random process includes intercept (c) and trend (t). Second, random process includes intercept but no trend. Third, random process includes no intercept and trend. In this paper we apply a model with intercept and without trend. As we have taken annual and not a very large data set, we will use the lag (n = 1). Therefore, we select (c, t, n) = (c, 0, 1) in the ADF test [10]. The result of test shows that all the variables; agriculture, commodity producing, domestic saving, exports, inflation, manufacturing, GNP per capita, total consumption, and school enrollment have stationarity in first difference. Table 4 shows the results. The test rejected the null hypothesis that there is a unit root in the first difference of every variable at 1% significant level (for variables agri, dsav, and exp) and at 5% significant level (for variables cpro, inf, pcgnp, tcon, senr, and manu). The Durbin-Watson statistics also support the value of each variable as significant.
Table 1.
variables ∆ Agri ∆ Cpro Dsev ∆ Dsev Exp ∆ Exp ∆ Inf ∆ Manu Pcgnp ∆ Pcgnp Tcon ∆Tcon Senr ∆Senr types of test (c,t,n)* c01 c01 c01 c01 c01 c01 c01 c01 c01 c01 c01 c01 c01 c01

Results of the Augmented Dickey-Fuller (ADF) test statistic
adf test statistic -4.903770 -3.651621 1.218537 -5.082234 1.723854 -3.824072 -3.352761 -3.613944 0.070956 -3.170047 1.828794 -2.995864 0.560222 -3.085038 1% critical value -3.653730 -3.653730 -3.653730 -3.661661 -3.653730 -3.661661 -3.653730 -3.646342 -3.653730 -3.661661 -3.653730 -3.661661 -3.646342 -3.653730 5% critical value -2.957110 -2.957110 -2.957110 -2.960411 -2.957110 -2.960411 -2.957110 -2.954021 -2.957110 -2.960411 -2.957110 -2.960411 -2.954021 -2.957110 durbin-watson statistic 2.015039 1.955597 2.237532 1.928875 1.937165 1.933252 1.571421 1.917730 1.964411 1.896355 1.682203 1.627565 1.993479 1.988181 prob.** 0.0004 0.0101 0.9976 0.0002 0.9995 0.0065 0.0206 0.0108 0.9583 0.0316 0.9996 0.0010 0.9862 0.0382

*Term c, t, and n represent intercept, trend, and lags respectively. **MacKinnon (1996) one-sided p-values. *** Here ∆ indicate the first differential of variable.

6. FINDINGS AND RESULTS In section 4 we have predicted the relationship between the export of Pakistan and the explanatory variables for the period 1972 to 2005 and then developed an econometric model. In this section we perform the regression test. Table 2 reflects our regression model’s estimated results.
Table 2.
Variable Constant agri cpro dsav inf manu gnppc tcon senr S R-squared Adjusted R-squared DW statistic Coefficient -0.12777 2.4271 -3.288 0.12857 1.5700 3.1121 1.0133 -0.8498 -0.7314 0.0862467 65.3 % 54.2 % 1.82426

Estimated Results
Std. Error 0.04971 0.8158 1.230 0.06259 0.3091 0.7350 0.4054 0.3616 0.3307 t-Statistic -2.57 2.98 -2.67 2.05 5.08 4.23 2.50 -2.35 -2.21 Prob. 0.017 0.006 0.013 0.050 0.000 0.000 0.019 0.027 0.036

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In the estimated result, S is the expected variation in the data, R-Sq describes the amount of variation in the export by the predictors, R-Sq (adj) is a modified R that has been adjusted for the number of terms in the model and DW is the Durbin Watson statistic test observed for residual autocorrelation. The model has passed several numbers of standard tests for the model specification. These tests include the t-test, R-Sq and residual autocorrelation (DW test). For the export data, the predictors (inf, gnppc, tcon, agri, manu, cpro, dsav, and senr) cause 65.3% of variation in the exports of Pakistan during the FY 1972 to 2005 and the adjusted R is 54.2%, which has a decrease of 11.1%. This signifies a good estimated model. Our estimated model’s DW test is 1.82. In particular, a DW statistic much less than 2 represents the case of positive serial correlation. In our model, the constant coefficient -0.12777 expresses that if there is no change in the balance of predictors then there will be a 0.13% decrease in the exports. The percentage change in the exports of Pakistan is strongly correlated with the percentage change in the predictors during the observed period. It is positively correlated with percentage change in the volume of agriculture growth rate, domestic saving, inflation rate, manufacturing sector growth rate, and GNP per capita. And it is negatively correlated with percentage change in the volume of total consumption, commodities producing sector growth rate, and school enrollment. Figure 2 represent four residual graphs in one frame that give us the true picture of our estimated model’s diagnostic test statistics. It shows that our model meets the assumptions of analysis and no error is found.
A : Normal Probability Plot of the Residuals
99 90 50 10 1 -0.2 -0.1 0.0 Residual 0.1 0.2 Residual Percent 0.2 0.1 0.0 -0.1 -0.15 0.00 0.15 Fitted Value 0.30

B: Residuals Versus the Fitt ed Values

C: Hist ogram of the Residuals
8 Frequency 6 4 2 0 -0.16 -0.08 0.00 Residual 0.08 0.16 Residual

D: Residuals Versus the Order of the Dat a
0.2 0.1 0.0 -0.1 1 5 10 15 20 25 Observation Order 30

Figure 2.

Residual plots for export of pakistan

A — Normal probability plot of the residual indicates whether the data is normally distributed, outliers exist in the data, and other variables that influence the predictand. In our model, no evidence of abnormality, outliers, skewness, or unidentified variables are found. B — Residuals versus fitted values graph demonstrating that all of the residuals are scattered randomly about zero. There is no evidence of irregular variance (fanning or uneven spreading of residuals across fitted values) or missing high order terms (curvilinear) existing in our model. C — Histogram of the residuals presenting a clear picture of residuals distribution for all of the observations. The standard histogram of the residuals should be bell-shaped. For the export data, no evidence of skewness (long tail) or outlier (a bar faraway from the other bars) is found in our model. D — Residuals versus the order of the data graph point out that the residuals in the plot fluctuate in a random pattern around the center line near zero. No evidence appears in our model that the error terms are correlated with one another [11]. Our estimated results illustrate that the relationship between exports and all the variables are significant; inf, agri, and manu at 1%, gnppc, and cpro at 2%, tcon, dsav, and senr at 5%. High rate of inflation in Pakistan is one of the major factors that cause devaluation in the local currency. In our model, the relationship between exports and inflation are positively correlated and significant, which means

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that an increase in the inflation rate will increase exports. This devaluation weakens the home currency against foreign currencies, which makes the exports of goods and services cheaper for other countries. A country can take advantage of this significant relationship by producing more and selling a high quantity. This will not only help in earning more foreign reserves but also help in imports payments. In order to take advantage from devaluation, a country must have sufficient resources for production. Otherwise, the home currency will devalue even further. According to the World Bank, GNP per capita is the dollar value of a country's financial output of goods and services in a year (its GNP), divided by its population. It reflects the average income of a country's citizens. In World Bank’s list of economies (April 2006) Pakistan fell under low income countries but its exports still have a significant relationship with GNP per capita. Increases in the GNP per capita will also increase exports. Pakistan is a country where the people have high consumption habit as compared to their earnings. When viewing the total consumption of last 34 years, it increased rapidly as the GNP per capita increased. But on the other hand, the export decreased with increases in total consumption. When the total consumption rate is high it lowers the savings rate. Therefore, less money is available for domestic investments which ultimately affects the production level and export volume. One of the major problems with the exports of Pakistan is that they are based on low value added products. If we have a look at the last 15 financial years, country exports have been based on only a few products. An average 81% of the exports are based on 5 items: cotton 60.19%, leather 7.15%, rice 5.58%, synthetic textiles 5.29% and sports goods 2.86%. Cotton and rice alone contributed about 66% of the total exports
[12]

. Such a

high degree of dependency on agriculture-related products is an element of uncertainty in export earnings. Agriculture in Pakistan is influenced by weather conditions and water resources. The decline in agricultural production due to the weather conditions not only affected exports, but also had bad effects on textile manufacturing. The relationship between export and manufacturing growth rate are the strongest in our model as compared with others variables. A 1% increase in the manufacturing growth rate will bring a 3.1% increase in export. In the last several years Pakistan has successfully moved from the stage of a primary commodity exporter to a labor-intensive manufacture exporter. The share of manufactured exports in total exports today is more than 85 percent and within manufactured exports there is a clear direction towards value-added exports [3]. Commodities producing sector consist of production of barrels of oil, electricity, grain, gold, beef, natural gas, bandwidth, water etc. The relationship between commodities producing sector’s growth rate and the exports of Pakistan is negatively correlated and significant at 2%. When there is any increase in the commodities producing sector growth rate exports decrease. It may be due to several reasons. One reason that comes to mind is that Pakistan might not be a commodities exporter country such as oil, natural gas, and electricity, or all the produced commodities are consumed domestically and nothing is left for exports. Or increases in the commodities production growth rate also leads toward high consumption and then there is shortage of domestic investment due to low saving thus, leading to a decrease in the exports. Domestic saving is the main source of local as well as international investment. Pakistan’s average gross domestic saving from 1997 to 2004 stood at 14.1% as compared with 47.5% for Singapore, 44.6% for Malaysia, 39.19% for China, 32.4% for Hong Kong, and 23.7% for India
[13]

. Pakistan has lower savings as compared to

all other developing countries of Asia. A small share of this savings has a wide penalty for Pakistan. The economy has less capital investments, and therefore, grew slowly and had a low industrial output. In the end, fewer products are available for export. On the other hand, the high rate of domestic savings provides domestic as well as the foreign investment opportunities, increased employment, industrial output and economic growth rate.

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The relationship between school enrollment and exports in Pakistan are significant and negatively correlated. It means an increase in school enrollment will decrease the export volume. Most of the industries in Pakistan are in the rural area and more then 65% of exports are dependent upon agricultural products. So, the high school enrollment may be causing the shortage of child labour, which affects the industrial and agricultural output. Or there may be shortage of domestic savings due to school fees that ultimately affect the domestic saving and exports of Pakistan. Pakistan’s export position is less then satisfactory, but much can be done to improve it like improved relationships with neighbor countries and setting the stage for bilateral trade with India, China, Afghanistan, and Iran especially. It is a good business opportunity for Pakistan to help Afghanistan in reconstruction. Pakistan has a big advantage that it has a cheap labour force. So it can make joint venture and foreign direct investment with China regarding establishment of labour intensive manufacturing industries and exchange of latest technology. Emphasis must be made on the import of raw materials, equipment, machinery, and new technology that is used in the industrial production. Exports must be based on finished or semi finished goods instead of raw materials that will enhance the export earnings. These days, local governments are reducing the trade tariff and import duties on raw materials in anticipation that these steps would also help in increasing the export volume. 7. CONCLUSION In this paper, with the help of an econometric model, effort is made to find out how the exports of Pakistan are influenced by different factors such as the agriculture growth rate, commodities producing sector growth rate, domestic saving, inflation rate, manufacturing sector growth rate, GNP per capita, total consumption, and school enrollment. We find that exports are positively correlated with percentage change in the volume of agriculture growth rate, domestic saving, CPI inflation rate, manufacturing sector growth rate, and per capita GNP. It is negatively correlated with percentage change in the volume of total consumption, commodities producing sector growth rate, and school enrollment. Moreover, our estimated results illustrate that the relationship between exports and all the variables are significant; inf, pcgnp, agri, and manu at 1%, cpro at 2%, tcon, and senr at 5% and cpro at 10%. At the end this study left some questions for future research work such as why the relationship of exports with commodities producing sectors growth rate and school enrollment are negatively correlated. ACKNOWLEDGEMENT This research was supported by COMSATS Institute of Information Technology Pakistan.
REFERENCES [1] Fouad A S (2005) Are Exports the Engine of Economic Growth? An Application of Co integration and Causality Analysis for Egypt, 1977-2003. Economic Research Working Paper No 76 African Development Bank, (July). [2] Tae-Y Y (2005) Planning for export led growth and development in the republic of Korea. Chapter 3 from www.unescap.org/drpad/publication/ldc6_2174/chap3 [3] Ishrat H (2003) Pakistan’s export competitiveness in global markets. Paper presented at the Seminar on Export-led Growth Strategy organized by the Export Promotion Bureau held at Lahore on 27th May, from http://www.sbp.org.pk [4] Gylfason T (1997) Exports, Inflation, and Growth, International Monetary Fund (IMF) Working Paper No. 97/119 Sep1 http://www.imf.org/external/pubs/cat/longres.cfm?sk=2337 [5] Mohsin H A, Shaista A and Mohammad S B (2004) Foreign direct investment, exports and domestic output in Pakistan Nineteen annual general meeting PIDE, Quaid-e-Azam university campus Islamabad Pakistan. Jan 13-15 [6] Faisal C (2004) Macroeconomic Stability of Pakistan: The Role of the IMF and World Bank (1997–2003) Research of the Program in Arms Control, Disarmament, and International Security (ACIDS) occasional paper University of Illinois

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at Urbana–Champaign May from http://www.acdis.uiuc.edu [7] Ali M.K (2005) “Exchange Rate Instability and Trade: The Case of Pakistan”, Pakistan Institute of Development Economics, Islamabad. Research Report no. 186 [8] Sadia B (2006) Determining Import Intensity of Exports for Pakistan, State Bank of Pakistan Working Paper No. 15 Sep from www.sbp.org.pk [9] Dr. Ashfaque H K (2004) Pakistan’s Exports: What Needs to Be Done? This article was published in Daily "Pakistan Observer" on August 28, 2004 from http://www.finance.gov.pk/articles/main.htm [10] Wang Y, Hui X F Abdol S S (2006) Estimating Renminbi (RMB) Equilibrium Exchange rate. APEA 2006 [11] Saqib G, Hui X F, (2006) Thirty years of chronic current account deficit 1972-2001: The case of Pakistan, Journal of Harbin Institute of Technology (New Series) Vol.14 No. 5 Oct. [12] Government of Pakistan Ministry of Finance, Economic survey 2003-04 Chap. 9th, Trade and payments, from http://www.finance.gov.pk/survey/home.htm and Author’s calculation. [13] Asian Development outlook 2003, statistical appendix Table A7 Gross Domestic Saving % age of GDP Page 287, from http://www.imf.org.

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